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BERR Globalisation and Labour Market Conference

Pat McFadden MP,  Minister of State for Employment Relations and Postal Affairs
BERR Conference Centre, 1 Victoria Street, London,  13 December 2007

This morning we are touching on a subject which, in different ways, is having a profound effect on our economy and society. Globalisation brings both significant challenges and opportunities for the UK economy and UK businesses.

And responding to the challenge of globalisation is core to the Department for Business, Enterprise and Regulatory Reform’s purpose – and is supported by all its objectives and PSAs.

Of course globalisation is not new. Although it has attracted attention in recent years, there have been waves of globalisation before, most obviously in the decades that preceded the first world war. Two world wars and the deep ideological struggles of the late 20th century held globalisation back. But with the fall of the Berlin wall and the communications revolution of recent decades we are now in the midst of a powerful wave of globalisation, with enormous worldwide movements of capital, goods and services and of course people.

But this wave of globalisation is different from previous episodes in three respects:

First, developing countries are increasingly playing a bigger role in world trade. This trend – and particularly the emergence of the giants of China and India - is accelerating the shift of the UK economy to a higher-value and knowledge economy.

Second, there has been a marked rise in intra-industry trade. Developments in ICT and communication mean that different parts of the production process can take part in different parts of the globe. And ‘off-shoring’ increasingly relates to services as well as goods. When small Indian restaurants in my constituency are having their accounts done in India with the help of a broadband connection, we know the reach of this is deep.

However, such offshoring is not a one-way street. We hear much about work being transferred abroad but globalisation is a two way street and the UK is a major beneficiary of offshoring by overseas companies – we are the second largest recipient of Foreign Direct Investment (FDI), with Europe as the largest source of inward FDI. And the UK is a substantial exporter of offshorable services.

This leads to the third reason that this wave of globalisation is different. There has been an increase in services trade, driven by ICT which has created new types of tradable services. While the offshoring of services to emerging economies is often seen as a threat to the UK, these developments have also created many opportunities for the export of high-value services.
This changing global economic landscape provides many opportunities, as well as challenges. Although the growth of China and India threatens some of our existing producers and jobs, their growth also offers British consumers cheaper goods, new markets for our exporters and faster-growing investments for our savings and pension funds.

The increased flow of people through migration is a central part of this. It is beneficial to the UK economy and in many ways to society yet there is no doubt that it also raises questions in local communities, particularly about the rules of entitlement and access to services.

The impact of migration on employment and wages does depend on the mix of migrants and the extent to which they complement, rather than substitute for, UK workers. While they tend to be more highly skilled than UK workers on average, many recent migrants still tend to be employed in lower paid jobs and sectors. However, a recent survey of the evidence by the Home Office and DWP for the House of Lords Select Committee on Economic Affairs found no evidence of an impact on employment.

The impact of the recent influx of immigrants on wage growth is probably more ambiguous. The limited UK research to date suggests that immigration boosts wages of most domestic workers but there is some evidence that it may also tend to modestly slow wage growth at the bottom of the earnings distribution. But this effect should not be exaggerated. It’s impact is very small and has been more than offset by increases in the minimum wage.

These benefits of globalisation translate into faster rates of economic growth and higher standards of living. But responding to the opportunities it brings means changes in the mix of goods and services in which the UK is competitive.

To maintain our competitiveness UK firms must, as the phrase goes, move up the value chain: ie invest in new technology, workforce skills and to move into advanced, high value manufacturing. The Government is encouraging companies and their staff to continually upgrading their skills and technologies so that we keep employment here.

This of course is not an easy option, nor is it one unavailable to other countries. They too can move up the value chain. Indian and Chinese graduates are just as smart as British graduates. They too are investing in new technology.

But the availability of this option to other countries does not make it any less essential for the UK. On the contrary, this kind of investment in technology and people becomes more essential if we want to produce higher quality jobs and raise productivity and incomes.

The Government’s role in this is to provide an open and competitive business environment, new and innovative ways of working, and helping create a skilled, confident and adaptable workforce so that the opportunities are enjoyed by the maximum number of people and indeed that the country does not lose out by not tapping the talents of all.

Of particular relevance to today’s conference is the importance of an efficient and adaptable labour market.

As an open, non-protectionist economy, with a flexible labour market, the UK has benefited greatly from FDI inflows. Our labour market has been identified by some investors as one of the reasons why they come to the UK and has sometimes been identified as the key location driver. In addition, in a tracking survey of inward investors that had set up in the UK – 11% identified labour market flexibility as an area that needed to be improved in other European markets, second only to bureaucracy at 20%.

Labour market adaptability is also increasingly important in a globalising world. As economic activity shifts into higher knowledge sectors, it is essential that workers are able to move between jobs and adapt to change.

That is why the Government is committed to maintaining and improving labour market adaptability. This commitment has been reflected in the strong labour market performance of the last decade, with 2.6 million more people now in work than in 1997.

Whilst the Government believes in maintaining and improving labour market adaptability, it recognises this cannot be at the expense of the rights of employees – particularly the most vulnerable.

We favour minimum employment standards that are sensitive to business conditions. This maintains the labour market flexibility that business requires, and which many workers prefer.

In striking this balance, the Government has put in place a fair framework of basic workplace rights, including the right to a minimum wage, a right to 24 days paid leave, and the right not to be forced to work more than 48 hours a week on average, but also, importantly, the right to do so if you choose.

Government is taking a tough but targeted approach to enforcement of these rights, including the establishment of the Vulnerable Worker Enforcement Forum which is looking into the nature and scale of abuse of worker rights, assessing the adequacy and resources of the enforcement framework, and identifying possible improvements.

It is also clear that many employees are using a more flexible labour market to achieve an employment package that better fits with their lives. They want to be able to work the hours that suit them, rather than the standard 9-to-5 day. Providing more flexible working arrangements is a key way both of adapting to consumer demands which themselves no longer fit with the 9 to 5 day and of ensuring that labour market participation – and overall prosperity – remains high.

The Government also recognises that globalisation can bring challenges for the most vulnerable workers. The move to a knowledge economy can be challenging and daunting to people who have to cope with a changing work environment and need to develop new skills. This is keenly felt in parts of the country which were previously strong in areas such as manufacturing. While globalisation brings overall benefits – there are winners and losers.

I mentioned the potential distributional impacts of migration earlier. The combination of globalisation and technological change is also likely to increase the premiums attached to skills and lower-skilled workers can find it more difficult to tap into the economic benefits of globalisation. That makes it all the more essential that we equip workers for change. It is not Government’s role to resist change or protect and freeze the economic environment. Instead we have to invest in the adaptability and capability of workers.

In the same vein, different areas will be affected in different ways. Regions with clusters of sectors in high value-added manufacturing and services stand to gain, while areas which do not have a strong asset base in high value-added sectors will find it difficult to compete with lower-cost production from countries such as China and India.

We have heard a lot about the world being flat in the last couple of years, and its true that political and technological barriers to market entry have fallen across the world. But the world is not only flat – it is also spiky, spiky in the sense that the benefits to knowledge sectors of clustering together mean that those cities and regions that have a lead in knowledge industries have a distinct advantage and economic activity is increasingly likely to concentrate in these areas.

Because globalisation will impact differently on different people and different places, the Government has an important role to play in helping people to cope and to adjust to the changes brought by globalisation. This is not about protecting people from change – which is not possible and indeed would lead to the wrong policy choices – but it is about investing in the capabilities of workers to help them respond to change.

As an example, we are working to support displaced workers at the local level. Where closures are likely to result from trade or off-shoring, RDAs take the lead in working with the company to examine potential alternatives. Where these are not found, they work with agencies such as JobCentre Plus to identify short and longer-term solutions to the problems which may be caused.

There is also a comprehensive package of support for those facing redundancy, including the Rapid Response Service operated by JobCentre Plus. This tailors post redundancy solutions to the needs of the local economy and labour markets. In addition there is a Rapid Response Action Fund worth £15 million available to pay for one off support to address individual barriers to re-employment.

Investing in skills is key to supporting people. The 2006 Leitch Review highlighted the importance of investing in skills to maximise economic growth, productivity and social justice in a globalised economy. Its recommendations are central to the government’s response to the UK’s skills challenge, set out in World Class Skills, and to the ambition to become a world leader on skills by 2020.

Hard skills matter and in a world where services are ever more important economically, so too do soft skills, the people skills demanded in areas of employment growth like hospitality, personal care and other important services.

We recently announced a doubling of funding in the Train to Gain Service as part of a big investment programme, which will see more than £11 billion a year invested in education, employment and training. By working closely with Jobcentre Plus through their Local Employment Partnerships, Train to Gain will help support people who have been unemployed to secure employment with training and progression on to higher level skills.

Government has also announced a major expansion of apprenticeships with over £1billion in Government funding to increase overall places from 250,000 today to more than 400,000 by 2010/11. The Government also plans to lift the education and training leaving age to 18 by 2015.

Of course, school reform is also an essential part of this and it is vital that we maintain the extension of opportunity that has been created to some of the poorest and most disadvantaged parts of the UK through the academy programme and other changes which have helped offer opportunity to communities too often denied it in the past.

These investments highlight that government is working to maximise the gains to the UK afforded by globalisation. As well as skills, this means continuing to make progress in other key areas such as, innovation, investment, enterprise, and competition.

However, the costs of globalisation often get more press than the benefits. The costs are more immediate and visible, while the benefits of globalisation such as lower cost goods and new market for UK products are wider and more difficult to measure.

This means that understanding the costs and benefits of globalisation is important, as is communicating these benefits to the public at large.

That is why I welcome events such as this conference and the research which is being presented here today. This includes the two papers which BERR has commissioned for this conference – one by Claudia Canals of “la Caxia” in Barcelona on offshoring and wages and one by Rebecca Riley of NIESR on jobs and UK trade. We need more research like this to foster better understanding of the processes of change, and help policy-makers manage the changes.

I hope today’s seminar will contribute to this process by stimulating and encouraging debate about globalisation within and outside of government.

I am sure you will find it a stimulating and enjoyable day.

Thank you.